Ep #64: Spending Money in Retirement

Full Episode Transcript
With Your Hosts
Micah Shilanski and Christian Sakamoto

Micah Shilanski: Welcome back to another amazing Plan Your Federal Retirement episode. I’m your co-host and co-founder, Micah Shilanski. And with me, I have a phenomenal advisor joining us in the studios today, Christian Sakamoto. Christian, thanks for being on bud.

Christian Sakamoto:     Micah, glad to be back. We are in Alaska now, coming up from Washington, so really excited to be here. We have been here while the weather’s turning into snow, which I’m looking forward to that transition. I know you guys had a lot of rain, but I’ll take snow more than rain.

Micah Shilanski: Amen. It’s one of those things we can’t control rather. I have a great friend; her comment all the time is there’s no such thing as bad weather, just bad gear being out there. But I do agree that in between shoulder season, man, I’d prefer if it’s either sunny or snowing, but that in between is a little bit fun.

And Christian, that kind of talks about a little bit of kind of that in between things, or things we need to be on the side of one side or another, is a little bit on cash flow. This is an under addressed topic or incorrectly … I’m going to go, ooh, I’m going to go on a little bit of a limb here.

I’m going to say this is an incorrectly addressed topic in our industry. So often other financial planners, I’ll meet with them … I just went to a conference, we had about 60 advisors that we were teaching inside of a conference, going through things. And it was fascinating because we did a case study all together as a group.

And it was really interesting to get these insights of these other 60 advisors going through things. And one of the things that I noticed, all great advisors, they’re phenomenal. They’re opening up, they’re looking to improve, they’re looking to do so many better things.

But one of the things that a lot of them are getting down to is saying, “Hey, we need to do budgeting with these clients. You need to do budgeting with your clients.”

And I don’t use the “B” word a lot with clients, it’s pretty negative. And I really think that budgeting is a misused topic. Sometimes, especially for our federal employees out there that have to do budgeting inside of their agency, it’s not a positive thing. It’s a drudge for them to go through. You really got to line out on so many different things.

And I often think that we over-complicate how simple cash flow needs to be for retirement planning. It’s key. Cash flow is king. Cash flow is the heartbeat of your retirement.

We have to know what it is, and we have to know how to spend money in retirement. We also have to do it correctly. Christian, what are your thoughts on that? Any pushback there?

Christian Sakamoto:     No, not at all. It is king and we do have to do it correctly. We really have to understand if we’re still working, it makes it really easy to know how much money is coming in because every two weeks, we’re getting paid.

Whether you’re single or you’re married, we can figure out how much money that you’re making, and from there, we just have to determine how much of that are you actually spending.

So, we spend a lot of time chatting about that with our clients, is really figuring out — okay, I’m making this up; client A has $4,000 a month coming in, Client B has another 3,000 a month, so that’s 7,000. Of that 7,000, how much is actually being spent?

So, we go through, we have that conversation, and again, it’s just trying to figure out is there any wiggle room there or is it true that all of the money we bring home is actually being spent.

Micah Shilanski: Yeah, that is such a great question about how is it being spent. I also want to throw in there the importance of this of where is it being spent. And this is where we can kind of cross the line a little bit on the budgeting side of it.

So, in my mind, let’s put through some definitions out there so we’re on the same page. In my mind, a budget is generally where someone says, “Hey, here’s 37 or 73 different line items. Of all of these things that I do, here’s where all of my money goes.”

And they really get into detail of how much it should be, which is definitely a way to do it. And by the way, if you’re a budgeting person, and you like doing it, I am not knocking it. Knock yourself out. That is definitely a way to know to where all of your money goes.

However, a lot of the clients that we work with, they’re not super excited about doing a budget. They’re like, “Alright, I need to do it.” It’s like a New Year’s resolution.

They’re going to do it for like once the next year and they’re not going to do it again, and I want sticky changes. Whenever we’re working with a client, I always want to do things Christian, and you’re the same way, I know, which is what I love, is you want to make sure whatever changes we’re implementing, are sticky changes.

They’re things that client’s able to keep doing because it doesn’t matter how great our plan is, it doesn’t matter how phenomenal our budget is – if it’s not able to be implemented consistently, it’s worthless.

So, we need to do something that helps get closer to that retirement goal that gives clarity on where our money is going, but is easy to implement. Does that sound fair?

Christian Sakamoto:     Yeah, absolutely. I’m the same way. I mean, if I’m going to be told advice, whether it’s financial advice, whether that’s marital advice, whether that’s, I don’t know, being a good father advice, there’s so many things there that we can hear that we can consider as noise.

But if I’m not actually going to be implementing whatever it is I’m being told for whatever reason, I have to gauge whether that advice was very practical or actually doable.

And if I’m not going to do it, it’s too much involved, too much brain power, either I don’t have enough time or I didn’t have a good action plan on how to do it, then yeah, I’m not going to do it.

And we don’t want to be just told feel good information. We want to be able to do what we’re told to actually make those improvements.

Micah Shilanski: So, Christian, does that mean on our next episode, I should have your lovely bride Susie on to find out what marital advice you’re not following? No, I’m just teasing, I’m just teasing

Christian Sakamoto:     Bring my kids, then they’ll tell you.

Micah Shilanski: Yeah, bring the kids, yeah, we’ll get the true confessions right from the kids, what comes out of their mouths.

So, let’s talk about things we can control like cash flow. So, Christian, as you and I work with clients and we’re building this, one of the things that we love to see is breaking your spending. And I call this cash flow planning; breaking your spending into about five categories. No more than that.

Sometimes there’s a reason we need more. Maybe it’s a rental property or a business or something else we’re doing, but 90% of the time, we can keep spending within five categories. Generally speaking, household travel, entertainment, medical, maybe kids, something inside of there.

So, those are generally the things I go through; household, travel, entertainment, medical and kids. Hopefully, I do the same letter for you guys.

So, one of the things that I like about that is when I break into five categories, it seems more doable. If you want to do it two or three, fantastic, but it needs to be a couple ones.

Now, a couple of pushback things that I get immediately from clients, Christian, let me know if you get anything different, is saying, “Well, Micah, the problem is I have one credit card and I put everything on one credit card. So, I got to use Quicken, I got to use Mint, I got to use YNAB or whatever these other apps are in order to separate out all of my expenses.” Does that sound like something that you hear as well?

Christian Sakamoto:     Yeah, it does, and something that before I learned this trick and the change to this, I was doing the same thing.

So, the change that needs to be made is instead of just using one credit card or two, for each of those topics, for each of those categories, let’s actually have a separate credit card to only be spent on that specific category.

That way there’s really no need to go back to Quicken or Mint to add it up. I have one credit card that’s just for household expenses. I have one credit card that’s just for travel expenses.

So, everything that’s related to that topic, I can use that credit card for — not a debit card, a credit card, and know how much a month, what’s that range? It’s between X and Y to really figure out what’s the average I’m spending in these categories.

Micah Shilanski: And I really like this because it helps a lot with a marital bliss side of it too, because generally finance is one of the top reasons for divorce. There’s a couple other ones as well, but it’s generally finance is going to be up there. And so great, how do we help streamline and smooth on this a little bit.

If you have a spending problem, that means you’re habitually running credit cards up to their limit, getting more credit cards, this isn’t the solution for you. Just to be clear, this solution is not for everybody. Then you need an envelope system.

Dave Ramsey has phenomenal things he goes through on envelope systems and how to set it out. So, if you’re in a spending problem, hey, all been there. That is definitely something that needs to be addressed.

This is not the strategy you need to pull out a Dave Ramsey strategy. You need to pull out the envelope system, which you can talk about on another podcast. That is probably the one you need to address.

If you don’t have a spending problem, you can pay off your credit cards frequently, I’m a huge fan of this Christian, you can nail it. I get multiple credit cards now. On the back of the credit card, I write down what category that’s for.

So, if it’s travel, I write on the back of the quarter, travel or household or whatever. Then pro tip here, move the credit card to a different spot in your wallet. Why? Because when I go to check out, I’m whipping out my wallet, the credit card, I’m not even thinking about it because I’m going to the same one every single time.

So, in order to get out of that habit, you got to put a credit card not in that same spot, and it just takes an extra second, that’s it, to grab the right credit card for the expense.

Sometimes that does mean huge Costco runs. Sometimes things are mainly for household and some things might be for entertainment. Okay, great, put a little divide, do two different checkouts. It’s really not that big of a deal for the impact that this gives you.

Now, you had mentioned it before, which I love Christian, you said a range. So, take that household credit card and we say great, husband and wife, what’s the range that this should be within a given month?

Why do I like a range? There’s a higher probability of success, and I don’t know, maybe it’s just me, but my household expenses are never the exact same every single month. It’s always different. There’s different things that come up.

So, I want a range, and then between my wife and I, Kelly, at the end of the month, we’re going to look at the card, we’re going to say, “Hey, was it between the range, yes or no?” If yes, I don’t say anything about spending. It’s perfect. It was within the range, we go on happily about our life.

If it was outside of that range, that means if it was higher than expected, we just have a quick conversation. It says, “Hey, looks like we had some extra household bills come up this month, looks like we’re a little bit over. Just thought I’d mention it so we can get Mac on track for this next month” and then that’s it.

I don’t want a diagnosis on some 72 line items about where she spent money. If anyone is out there who’s married, has ever tried this, it does not work well because it’s probably my fault, anyways.

So, I want a range, I want a simple way that we can have success at a marital level, and then I want a simple way to track. As long as it’s between X and Y, we’re good. And then the same thing happens. The reason we’re saying multiple credit cards, I’m sure some people are there saying, “Hey, I could do this all with one credit card.”

Well, my problem and maybe it’s just a Micah problem, nobody else; but if I just use one credit card and my credit card all of a sudden is holy crap, it’s 12,000, $15,000, then all I get into is justification mode.

Then I say, “Oh, it’s because that trip was on there. Oh, it’s because we had the family reunion. Oh, it’s because that medical expense was on there,” and really, that was only $3,000, it wasn’t the other 12,000 of expenses that I had run up. We start giving this justification mode. And now, if I separate those things out to separate cards, it makes it really transparent as to where my money is going.

And just like so many things, when we start focusing on something, now I can make improvements. And those improvements happen subconsciously. They don’t happen having to tighten the belt and not spend less.

They’re like, “Huh, maybe I’m wasting a little bit of money.” And subconsciously, we start spending less. Sorry, Christian, bit of a rant. What’s your take on that?

Christian Sakamoto:     Nope, I a hundred percent agree. I think at the end of the day, having a range is really going to be the most helpful. It’s better than having it be a certain dollar amount because as soon as you go over that, it’s not going to feel good. Not a good situation. We don’t want that.

Micah Shilanski: Exactly. And then if it’s habitually over that, okay, do you need to adjust it? Is your range just incorrect? Or do we have a spending problem? Is it something else we need to address? Now, why does this matter? Because cash flow is the heartbeat to retirement.

We say that because we need to get cash flow for our clients. We need to provide cash flow to them, but we got to know how much you spend. And so, this is the way that I’m going to look at that.

The other thing, the hack that we’re looking through from the financial planning perspective, is if one of the common misconceptions, Christian, again, feel free to push back if you see this differently; but it’s, “Micah, when I retire, I will spend less because I’m not commuting, I’m not buying those expensive work clothes, and so, I’m dramatically going to spend 30% less money.”

No, that just doesn’t happen. We’re creatures of habit. We’re used to spending money in a certain fashion, some things will change, but we’re used to spending that money. So, we need to know a basic idea of where that money goes.

Christian Sakamoto:     Yeah, I agree. And for those who’ve been listening to the podcast for a while, you’ll hear us say this. And so, I’m seeing it less working with clients that they’re having that conversation that they want to spend less in retirement.

It’s because we’re having these conversations now saying, you know what? It’s really unlikely, actually that you’re just going to, all of a sudden, the day you retire, spend less money.

There’s going to be trips that you want to have done, maybe some projects around the house. And sure, commuting might be less if you’re still working in-person and not from home. But really, it’s unlikely that you’re going to be spending less.

And we can go through the list of all the things that we’ve been told, but I’m actually seeing that less and less now just because we’re talking about it. I think that people are aware that they’re not going to be spending less.

Micah Shilanski: Yeah. So, again, and this is the other thing we talk about; what we’re looking for is the right number that you’re spending. The worst thing you could do, the worst thing you could do is lie to yourself about your finances and your spending, and then magically think it’s going to be fixed in retirement.

We are where we are. I’ve seen people in all different types of situations come into our office and work with us one on one, and there’s no shame and there’s no embarrassment. We are where we are. The biggest thing we want to see is how do we move forward to that next level?

How do we get you to your goals and where you want to be? Especially with a very honest conversation and very much analyzing our spending to see where’s that money going?

Christian, let’s put this a little bit in a retiree mindset; some of the key terms that I always get a little bit nervous on when a client goes to retire when they start saying, “Well, Micah, this is a once in a lifetime opportunity.”

Once they say that, I’m cringing a little bit on the inside because I know they’re about to ask for a big cheque. And the part that I’m worried about is not that once in a lifetime opportunity, it’s that that’s going to start coming up on an every single year basis. What do you think?

Christian Sakamoto:     Yeah. I’m the same way; once in a lifetime, or I’ll never do this again. Those are the kinds of things that we have to be careful of.

I want my clients to goal set. I want them to have their goals going into retirement. And in retirement, I want them to know and be aware of some of those major purchases, major trips, major projects that they’re working on, but I don’t like surprises.

So, as much as we can avoid them, I’d love for my clients to write those down and have that conversation with me, their trusted advisor, or working with some other advisor, being able to communicate those, so they’re not just unexpected expenses, and rather, we have a plan on where is that money going to come from.

Micah Shilanski: Yep, yep. That is absolutely going to be just a really big key inside of this. Now, you brought up a great point; this isn’t about not doing those once in a lifetime things, that’s about making sure we’re not using that as an excuse to break our financial plan.

So, one of the things that we always do is come back and say, “Hey, what’s our overall goal? What’s our number one priority that we are solving for? And why is this important?”

You brought out goal setting, why it’s important, because that’s going to be the litmus test, that’s going to be the benchmark that we’re going to use to make all decisions.

And that’s why I tell clients, it says, “Look, if your overall goal is saying when I retire, I want to have $9,000 a month in take home income plus inflation for the rest of my life and I don’t want to have to worry about where it’s going to come from” — fantastic.

Now, I got a goal, it’s $9,000 a month, I got to worry about inflation, I got to worry about taxes, that’s my job. But $9,000 a month in take home income. That means every decision we should be making going forward, I need to bounce it back against that.

Does it help or hurt that $9,000 a month? And if all of a sudden we’re making an exception to take out more money out of our retirement accounts because it’s a once in a lifetime opportunity, does that help or does that hurt our goal of $9,000 a month? And that’s what we mean by having these conversations.

So, sometimes when I cringe with it, it’s not saying I don’t want my clients to go out and do things; I really encourage them to do, but we got to make sure we have our priorities set up. And sometimes, our priorities change.

Maybe the priority’s not $9,000 a month — okay great, but let’s have that honest conversation, and then we can move the priorities up and down. So, you’re always making decisions intentionally about where you want to go.

Christian Sakamoto:     And sometimes, if we do want to go on a specific trip or we have a, like I said, a project on the house or remodel, what have you; instead of going for the first choice, maybe we still go on the trip or do the remodel, but we tweak it a little bit.

Maybe we don’t get the nicest trip options available. We can go through the list of all the different variables of things we can tweak to still compromise. I don’t want our clients to have to compromise on anything, and that’s not what I’m saying either.

But if it does go back to the goal of, in Micah’s example, $9,000 a month, and this is really going to push you to that $10,000 a month — okay, what can we give up for the next six months to a year from the other spending in our lives to sort of get that to equilibrium, to where it really didn’t have the impact and you can go ahead and do those things.

Micah Shilanski: Yeah. Amen. Well, Christian, this podcast is all about action items. So, let’s get some action items for our listeners that we can kind of jump into. So, I’m going to say the first one is creating a cash flow plan. What’s your plan for how you spend money?

Now, if you’re a budget person and you want to do a budget and you know you’re going to crush it, rock on, go do that budget. I love it. If you’re like 98% of the rest of us that don’t like going into that much detail, great, what’s your cash flow plan?

Again, my recommendations is five categories, no more than that. Break those things down so you know where your money goes.

Christian Sakamoto:     And on the same lines, once you have that cash flow plan, set a time to review it. Whether that’s three months later or six months later, it’s a good idea to have some history behind it to where it’s not just the next month because things are going to come up that again, will spike the number or decrease the number so you won’t get a good average.

So, make sure you create your cash flow plan and then you set a time to review it to make sure everything’s on track.

Micah Shilanski: Yeah, such a great idea. Last one I want to say is increase savings. This is an easy one for our workers to easily do. You’re probably going to get a pay raise with all the inflation stuff that that’s come out. We’re airing this a little bit before the numbers are officially posted. I’m sorry, recording this before the numbers are posted, but you’re probably going to get a pay increase.

Anytime we get an unexpected pay increase, I want you to say 50% of that unexpected money, put it towards long-term. Let’s the 50% hit the bottom line. Allow that money to come in to do the things you want to do, but at least make 50% towards future planning. But more on that TSP, put more in your HSA.

We talked about podcasts and those are fan freaking fantastic. I love HSA accounts. Put more in your Roth account, there’s so many things you can do, make sure you’re saving for your future.

And until next time, happy planning.

Christian Sakamoto:     Happy planning.

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